Directors’ Rights and Liabilities for their Ultra Vires Acts

The acts of directors which may be regarded as ultra-vires are two fold in nature, namely, (a) the acts which are beyond their authority but within the

company’s powers (i.e., intra vires the company) and (b) the acts which are beyond the directors’ authority as well as the company’s. The rights and

duties which emanate from ultra vires acts are as under:

(i) Under the Companies Act, the funds of the company can be applied in carrying out its permitted objects. Therefore, if an ultra vires payment is made by

directors of the company, e.g., payment of interest out of capital, they may be compelled to repay the money to the company even after it goes into

liquidation (In Re. Sharpe). But the directors so compelled to refund the money to the company could claim to be indemnified by the payees who received

the money from the directors with the knowledge that the payment to them was ultra vires. The reason for this rule of indemnification is that in such a

case, the payees would be constructive trustees of that money [Russel vs. Wakefield Water Works Co.].

(ii) The directors are the agents of the company. Therefore, they cannot do anything which the company itself cannot do under its Memorandum. But if

they make a contract within the powers of the company (i.e., intra vires the Memorandum)